Go Long. And Go Big or Go Home.

Venture-backed startups are staying private longer (no news here).  But how much longer? As venture capital investors, we are trying to learn from past mistakes and successes. And we need to calibrate for different market environments. A recent observation is that the sideways exits below $100M in deal value are vanishing. Startups keep going until they go bust or go big.  The good news is that more exits find a home (instead of a liquidation process). The bad news is that VCs don’t see their money in many of these: The number of zombies is growing, and the number of winddowns is silently growing as well (and not openly reported or well tracked in Pitchbook).

  • As of 09/15/2018, 5-year and younger venture-backed IT startups had a -35% smaller share of the overall venture-backed IT exits compared to 2013. Conversely,  the share of six- to eight-year-old venture-backed IT exits in rose 44% compared to 2013.
  • We are seeing a bifurcation in the market: Acquisitions (M&A and buyouts) in venture-backed IT exits increased from 64% in 2013 to 81%. Conversely, the share of liquidations in venture-backed IT exits came down from 22% in 2013 to only 3% in the last 365 days.
  • The share of acquisitions in the $25M to $99M range shrinks further. And the percentage of acquisitions with a reported deal value below $25M dramatically shrinks by more than 40%, while the percentage of undisclosed deals increases by 7%. Conversely, the percentage of IT acquisitions with deal-values above $100M grew by +18.7% in the past 365 days compared to 2013. And the percentage of IT acquisitions with deal-values above $500M grew by +30.9%.

 

The Data.

I ran a Pitchbook search for venture-backed exits from 2013 through mid-September 2018 and then filtered by founding year.

age distribution of venture-backed startups at exit
Source: Pitchbook. Age distribution of venture-backed startups in Information Technology at the year of exit from 2013 through 09/15/2018.

The Pitchbook data might not be complete. Exits in 2018 of companies 12 years and older were founded in 2007 and earlier.  Exits in 2013 of companies 12 years and older were founded in 2002 and earlier.  The data on earlier companies might not be complete, and the data in the past two years might be distorted by venture firms that intentionally obfuscate round sizes or exits to avoid any signaling. But let’s assume the general trend is still correct. Here is a more summarized form of the same data:

age distribution of venture-backed startups in Information Technology at year of exit
Source: Pitchbook. Age distribution of venture-backed startups in Information Technology at the year of exit from 2013 through 09/15/2018.

The data shows that in 2018 there were 35% fewer venture-backed IT exits of age 5-years and less compared to 2013. Conversely,  there were 44% more venture-backed IT exits of age six to eight, and 13% more venture-backed IT exits of age nine years and older when compared to 2013.  2018 (at least so far) saw a change of -31%, +23%, and +16% in the respective age groups of venture-backed IT exits compared to their respective 5-year averages (2013 through 2017).

More venture-backed IT startups find a home through M&A or buyouts. But outcomes bifurcate.

The story becomes even more interesting when we compare the types of exits and volume. Below graphs compare the type and transaction volume of venture-backed IT exits in 2013 with the last 365 days (as of September 15th, 2018).

number of venture-backed exits in Information Technology by type of exit
Source: Pitchbook. Number of venture-backed IT exits by major exit types for 2013 and the past 365 days (as of September 15, 2018)
Deal volume of venture-backed exits in Information Security by major exit types
Source: PItchbook. Deal volume of venture-backed IT exits by major exit types for 2013 and the past 365 days (as of September 15, 2018)

The share of acquisitions (M&A and buyouts) in venture-backed IT exits increased from 64% in 2013 to 81%. Liquidations came down from 22% of all venture-backed IT exits in 2013 to only 3% in the last 365 days. So we are seeing a bifurcation in the market: Companies are surviving longer, and when they exit, they either go bust (without liquidation) or find a home somewhere. Buyouts became a significant exit path.

That bifurcation becomes more interesting when looking at deal values: While the overall number of IT exits were almost the same, the deal volume grew 2.6x.  IT IPOs raised 6.6x more money, the IT M&A volume more than doubled, the IT buyout volume almost tripled. But for acquisitions, more companies get acquired for an “undisclosed” value, and fewer companies are reported in the $0-99M range.

Distribution of Deal Values in Venture-Backed Acquisitions
Source: Pitchbook. Distribution of deal values in Information Technology acquisitions (buyouts, M&A, reverse mergers, etc) that were venture-backed (last 365 days as of 09/15/2018)

So while a higher percentage of IT acquisitions are of smaller deal value, the percentage of acquisitions above $100M is also growing.  In 2013, 8.98% of all acquisitions were above $100M, and 1.96% were above $500M.  In the last 365 days (as of 09/15/2018), that number grew by +18.7% and +30.9% respectively, to 10.66% and 2.56% of all IT acquisitions.

Distribution of Deal Values in Venture-Backed Acquisitions, $100M+
Source: Pitchbook. Distribution of deal values for acquisition of venture-backed IT startups above $100M (last 365 days as of 09/15/2018)

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